Malaysia’s latest industrial output reading heralds sharp 2Q GDP contraction

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KUALA LUMPUR (July 10): Malaysia’s economy, as measured by gross domestic product (GDP), could have contracted sharply by over 10% in the second quarter of 2020 (2Q20) from a year earlier, analysts said today, after they took into account the substantial year-on-year (y-o-y) decline in the nation’s industrial output in April and May at 32% and 22.1% respectively due to the Covid-19 pandemic.

Yesterday, the Statistics Department said in a statement that the industrial production index (IPI) tumbled 22.1% in May 2020 from a year earlier due to the significant decline in all three components of the IPI. The department said the manufacturing and mining components declined 23.2% and 22.2% respectively while the electricity segment dropped 10.3%.

Today, Affin Hwang Investment Bank Bhd's economic research team wrote in a note that the full negative impact of the Malaysia’s movement control order (MCO) has been reflected in the nation’s 2Q20 real GDP growth.

"Growth in IPI declined by an average of 27% y-o-y in April-May, sharply lower than 0.4% in 1Q20, pointing to a sharp contraction in real GDP growth in 2Q20. Following the sharp contractions of IPI growth in April and May, we expect Malaysia’s real GDP growth to contract sharply by an estimated 10.5% y-o-y in 2Q20 (0.7% in 1Q20).

"For the whole of 2020, we maintain our real GDP growth forecast of -3.5%, lower than the official forecast range of -2.0 to 0.5% (4.7% in 2019),” the team said.

AmBank (M) Bhd economists wrote in a note today that assuming there is no second wave of Covid-19 infections, the Malaysian economy should start to improve in 2H2020 at a modest pace. 

"On that note, our base case growth for 2020 is around -2% with the downside at -5%. Still, the economic growth in 2Q2020 is expected to report the worst contraction after a 0.7% growth in 1Q2020 where our preliminary estimation (for 2Q20 GDP) suggests a contraction of between 10% and 13%,” they said.

Bank Negara Malaysia (BNM) is scheduled to announce the nation’s 2Q20 GDP numbers on Aug 12, 2020.

BNM said in its Economic & Monetary Review 2019 report that against the highly challenging global economic outlook, it projected Malaysia’s GDP growth to be between -2% and 0.5% in 2020.

According to the central bank, risks to global growth were tilted to the downside, mainly reflecting significant uncertainties surrounding the Covid-19 pandemic. 

"The extent of the economic impact arising from this pandemic would be contingent on the severity and duration of the outbreak in various economies and the corresponding measures undertaken to contain this global health crisis. Weakness in the real economy could be further weighed down by prolonged tightening of global financial conditions,” BNM said.

Malaysia’s 2019 GDP grew 4.3% from a year earlier, while 1Q20 GDP expanded 0.7% y-o-y, according to BNM and the Statistics Department.

For 1Q20, BNM said in a statement on May 13, 2020 that on a quarter-on-quarter seasonally-adjusted basis, the economy contracted 2% during the quarter.

On Tuesday (July 7),  BNM cut its overnight policy rate by 25 basis points to a record low of 1.75%, saying that the impact of the Covid-19 pandemic on the global economy is severe and that Malaysia’s economic activity contracted sharply in the second quarter of the year due to measures introduced to contain the pandemic. In a statement, the central bank said Malaysia’s inflationary pressures are expected to be muted in 2020.

Malaysia's MCO, which was initially scheduled between March 18 and 31, 2020, requires non-essential businesses to stop operations, while the public was ordered to stay at home to curb the Covid-19 outbreak.

On March 25, Prime Minister Tan Sri Muhyiddin Yassin said the government decided to extend the MCO until April 14, because updates from the National Security Council and the Health Ministry indicated an increase in Covid-19 cases. 

On April 10, Muhyiddin said the government was extending the MCO until April 28.

On April 23, Muhyiddin said the MCO would be extended for another two weeks until May 12.

On May 4, news reports, quoting Senior Minister (Security Cluster) Datuk Seri Ismail Sabri Yaakob, indicated that regulations under phase four of the MCO were null and void with the commencement of the conditional movement control order (CMCO) or phase five of the MCO.

On May 10, Muhyiddin said the CMCO would be extended to June 9.

On June 7, Muhyiddin said the CMCO scheduled to expire on June 9 will be replaced with the recovery movement control order (RMCO) beginning June 10 until Aug 31.